Tax Break

John Fisher, international tax consultant

Archive for the tag “trusts”

Trust the taxman?

Perhaps not as bumbling an idiot as he looked…

My first suspicion that authority wasn’t all it was cracked up to be was at the age of 10, when I saw Lionel Bart’s newly released Oliver! Between the catchy numbers and faux-dirty actors there were two clear messages – the inhumanity of the workhouse system and Mr Bumble’s ‘The law is a ass, a idiot.’

Workhouses had blessedly long gone even then, but I have had many occasions in my long career to echo Mr Bumble’s sentiment. And if Dickens meant the term ‘ass’ in its asinine sense,  I am sometimes tempted to go with the American usage.

There have been many occasions when a sloppily drafted law has been saved by the tax authority, with liberal and, sometimes, downright anarchical interpretations that could only be strictly justified by a completely new interpretation of the letters of the alphabet used in the drafting.

There are often a lot more forms than substance

But, more often than not, it is not the case. While they will invoke ‘substance over form’ in incidences to their advantage – fairly confident that the courts will back them up if matters get that far – the authorities will fight hammer and nail to impose the letter of the law, hiding (possibly fairly) behind the excuse that they cannot ignore the written word.

And, just occasionally, they go a step too far.

If we are to believe the myriad reports of a case at the end of July, one of those steps is on the way.

I won’t dwell on the details of the case which has already been reported to saturation point, but suffice it so say, trust tax law – largely legislated with effect from 2006 – generally considers the contribution of an asset to a trust as a non-taxable event (a gross oversimplification, if ever there were one). The problem is that, for purely anachronistic reasons, Israel has a separate law for the capital gains from local real estate transactions. It, and its predecessor, simply predated Israel’s taxation of capital gains and for reasons I sadly suspect many of us understand, the situation has never been put right. The real estate law stayed silent beyond some existing archaic provisions that were essential for real estate transactions. The taxpayer argued that the transfer of real estate to a trust should not be a tax event – in logical line with the treatment of all other assets, as must have been the clear intention of the legislator – and the tax authority disagreed.

Blessedly, the committee appointed under the law  to hear the appeal of the taxpayer, comprising two respected accountants and a senior judge, found in favour of the appellant. The ruling was reasoned and well-presented doing what I, in my recurring naivety, thought  was what the tax authorities found difficulty with – filling in by stealth the missing bits of the law that should have been, but were not, there.

I assumed that would be it. The tax authorities were given a peg on which to hang their coat, and the world could carry on. The judge even recommended that the legislature add the relevant provisions to the statute so as not to permanently be required to rely on case law.

Dickens was quite obsessed with the failings of the legal system

Well, according to the professional ‘press’, I got it wrong. The tax authority is expected to blow a raspberry at the decision and pursue an appeal in the High Court.  Apart from the relative certainty that they won’t win, I don’t begin to understand what they are reported to be contemplating.

It would simply not be fair.

Hoisted with their own petard

The good old days

In Tudor times it was traditional for condemned gentlemen to pay their own executioner. The equivalent in my world is the statutory requirement to report any of a series of positions taken in a tax return that the tax authorities do not agree with. The tax inspector no longer needs the deductive powers of a gumshoe – he or she can just sit in the comfort of their torture chamber picking their victims off one by one. The good news is that you need to be making quite a packet from your planning to be forced to the block – 5 million shekels in the current year or 10 million shekels over 4 years. The bad news is that there are 57 varieties (or positions) to choose from.

Although the list came out in December last year, the form for reporting – which is just really an index of the December headings, and could have been put together in half one of the many hours saved investigating – finally hit the presses earlier this month, just in time for some to miss the filing date of their  tax returns. What is most interesting is that most of the ‘positions’ could better be described as the ‘law’. The tax authorities seem to have taken a leaf out of US Immigration and Customs Enforcement‘s book: ‘Do you seek to engage in or have you ever engaged in terrorist activities, espionage, sabotage, or genocide?’ Like someone is going to announce they have been evading tax.

Some parents live in obscure faraway lands

However, one that caught my eye concerned the profit to be reported on the sale of trust assets. The pronouncement by the authorities (already back in 2017) was not controversial – the sale of an asset that had started life outside the Israeli tax net was subject to capital gains tax on the full gain – painful, but common international practice (and the clear law). The explanatory notes, however, included an exception relating to ‘Relatives Trusts’.  When the legislature took its last swing of the axe at trust tax planning in 2013 making everything taxable, there was one small sweetener. While distributions to Israeli beneficiaries would face a tax bill, Ma and Pa who had set up trusts in the obscure faraway lands where they still lived, would – together with their trustees – be largely let off the hook from reporting in years when distributions were not made (unless they chose otherwise). The explanatory notes spread the bonhomie further by making clear that relatives trusts set up before 2003 would get a step-up in value for capital gains tax purposes to January 1 of that year. The explantory notes were cross-referenced to the tax authority’s notes on the trust law. The only problem was, they didn’t fit. Where did 2003 come from? In fact, what the blazes did 2003 have to do with trusts at all – It was the one area actively ignored in the great tax reform of that year. The explanatory notes were silent.

They could always try and take it with them

But, if we are already talking about relatives trusts, there is sadly no happy ending. The authorities were nice to Ma and Pa. They even decided not to mess things up until not one, but both, of them were safely tucked up in their faraway graves. Then the fun would start. A relatives trust would become an Israeli resident trust – facing full taxation even of the bits heading to foreign siblings. While there were regulations offering solutions (potentially painful) for trusts to carve out foreign beneficiaries’ income from the Israeli tax system, the wording didn’t comfortably include relatives trusts which started life as something statutorily amorphous.

So, as with so much in Israeli tax law, assessees grieving their parents now find themselves at the mercy of the tax authority. In fairness, the authorities do their best to produce a sharp result from blunt legislation. But it can take a lot longer than a Tudor treason trial.

Relatives trusts need tender loving care if their beneficiaries are to avoid the ignominy of the scaffold.

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